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fiveHedged - Micro Russell 2000 Futures


A number of my subscribers have been asking if there are alternative instruments to long-RWM (or short IWM) for hedging the five-stock portfolio I run.

Thankfully there is some good news coming in the form of " Micro E-mini Russell 2000 Index Futures", (Symbol: M2K), which C2 advise will become available on the platform tomorrow (IB launched it earlier today).

More Info (CME):

As a single contract is worth $5 x Russell2000 (approx $5 x 1580 = $7900), it is a simple process to quantify a ‘multiple’ of the five-stock portfolio value to this contract-value (currently $7,900), and short it against the portfolio…

Example: Hold the five stocks total value $47400 (5 stocks x $9480 each), hedged by 6 contracts (short) of M2K (6 x $7900 = $47400) = market-neutral 1:1 hedge.

Replacing RWM with the futures does provide marginally better returns in tests, but up until now I have not discussed this in any depth, as a single ‘emini’ contract (value around $79k) would be a barrier to entry for many investors. Hence the ‘micro’ contract makes much better sense in terms of accessibility.

Investors can continue to use the RWM if they wish. The profitability is not significantly affected (only slightly better with the micro futures).

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